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Beacon Roofing (BECN) Plagued By Headwinds: Time to Dump?

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On Aug 23, we issued an updated research report on Beacon Roofing Supply, Inc. (BECN - Free Report) . The company’s performance will be hampered competitive pricing, difficult year-ago comparisons in Southwest United States and issues in Canada.

Beacon Roofing’s third-quarter fiscal 2017 top and bottom lines improved on a year-over-year basis but missed the Zacks Consensus Estimates. The company lowered revenue growth range for 2017 to 5-6%, lower than the prior guidance of 6-9%. This takes in to consideration lower-than-expected sales rate in the third quarter due to higher rain and more limited reroof work as a result of milder winter weather. While the company expects a more normal rainfall impacting the fourth quarter, the drag effect from last winter will continue in certain northern markets, impacting the quarter’s sales. Organic growth outlook for the full year is 2-4% on a daily sales basis.

The company had earlier provided daily sales guidance of 4-6%. The company now anticipates adjusted full year earnings per share to be between $2.15 and $2.25. Beacon Roofing had earlier projected earnings per share at around $2.34. Further, it is projecting 2017 full-year gross margins at 24.5-24.6%, in line with fiscal 2016. The fourth-quarter comparison will be particularly difficult as the company posted its highest gross margin ever in fourth-quarter fiscal 2016.

The commercial roofing market has been experiencing more heightened competitive pricing pressures recently. The segment was also impacted by deferred work due to wet weather in the company’s normally strong commercial regions.

Southwest United States and Canada continue to be the company’s weakest performing regions. The Southwest region suffered a sales decline of 7.9%, reflecting difficult year-ago comparisons tied to hail damage in Texas. In third-quarter fiscal 2016, the company had witnessed a 46% increase in sales in the Southwest. Year-over-year comparisons in the Southwest will remain difficult during the coming quarters because of the magnitude of last year's hail's damage.

Sales in Canada dropped 16.2% during the quarter. Eastern Canada is being negatively impacted by a variety of factors, including heightened competitive pressure; more limited, larger project work; along with the increased levels of rain and consecutive mild winters.

Beacon Roofing’s suppliers in both residential and nonresidential sectors have announced multiple price increases during 2017 in response to rising cost pressures from escalating raw materials. Most recently, several vendors have attempted to pass through low to mid-single-digit price increases in residential roofing and in other products. End market acceptance of these higher prices remains uncertain at this point.



Moreover, Beacon Roofing underperformed the industry with respect to the year-to-date price performance. The stock dipped 14.0%, while the industry recorded growth of 6.8%.

Additionally, Beacon Roofing has been witnessing an unflattering movement in its earnings estimates trend, reflecting ongoing pessimism in the stock’s prospects. In the last month, current quarter earnings estimates have moved down 11% due to eight downward revisions versus none in the opposite direction. Meanwhile, current year consensus estimate has been revised 7% downward due to nine negative revisions versus none moving south. Likewise, the estimate for the next fiscal has moved down 6% due to nine negative revisions.

Beacon Roofing currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks worth considering in the sector include Rush Enterprises, Inc. (RUSHA - Free Report) , The Home Depot, Inc. (HD - Free Report) , and Lumber Liquidators Holdings, Inc. (LL - Free Report) . Rush Enterprises sports a Zacks Rank #1 (Strong Buy) while Home Depot and Lumber Liquidators carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Rush Enterprise’ earnings estimate for fiscal 2017 currently is pegged at $1.83, reflecting a 62.24% year-over-year growth. The earnings estimate for fiscal 2017 for The Home Depot is at $7.30, reflecting year-over-year growth of 13.19%. The Zacks Consensus Estimate for Lumber Liquidators for fiscal 2017 is at a loss of 69 cents, a considerable improvement from the loss of $2.51 in the prior fiscal.

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